1) no longer use numerical limits to identify overcommitted directors, and instead
2) vote against the chair of the nominating and governance committee at companies in the S&P 500 that do not disclose their internal policy on director time commitments.
This heads-up about the 2024 change to the firm’s overboarding policy is consistent with the preference that SSGA shared in “Managing Through a Historic Transition: The Board’s Oversight of Director Time Commitments.” It also aligns with the new policies on risk management and board & director evaluations. SSGA urges nominating committees to “evaluate their directors’ time commitments, regularly assess director effectiveness, and provide public disclosure on their policies and efforts to investors.”
Some companies may want to revisit their policies – and related disclosures – in light of this threat to the nom/gov chair. If changes are needed, it could take some time to prepare those and work through all of the channels for approval. It’s helpful that SSGA is giving us a year to do that.
R-Factor, we barely knew thee. Launched in 2019, State Street is apparently now bidding adieu to its proprietary scoring system, the R-Factor – which stood for “Responsible-Factor” – or at least, not incorporating it into voting decisions this season. Karla pointed out that it no longer appears in the firm’s “Proxy Voting and Engagement Guidelines” other than in the closing notes. Last year’s guidelines had said:
R-Factor™ is a scoring system created by State Street Global Advisors that measures the performance of a company’s business operations and governance as it relates to financially material ESG factors facing the company’s industry. R-Factor™ encourages companies to manage and disclose material, industry-specific ESG risks and opportunities, thereby reducing investment risk across our own portfolio and the broader market. State Street Global Advisors may take voting action against the senior independent board leader at companies on the S&P 500 that are R-Factor™ laggards and momentum underperformers and cannot articulate how they plan to improve their score.
As a follow-up to its position as a “long-term corporate partner,” which I blogged about on our Proxy Season Blog last fall, and consistent with BlackRock, SSGA has also backed away from hot-button “ESG” terminology and partnerships. Karla flagged these updates:
• About State Street Global Advisors – Revised wording somewhat to align with December 2022 changes to same section in “Global Proxy Voting and Engagement Principles,” primarily removing “As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance.”
• Environmental And Social Issues – Revised wording somewhat to align with December 2022 changes to same section in “Global Proxy Voting and Engagement Principles,” primarily removing “We use our voice and our vote through engagement, proxy voting, and thought leadership in order to communicate with issuers and educate market participants about our perspective on important sustainability topics.”
But perhaps the most significant change on the “ESG” front is that SSGA has significantly abbreviated its “Climate-Related Disclosure” policy. The old policy said:
We believe climate change poses a systemic risk to all companies in our portfolio.
State Street Global Advisors has publicly supported the global regulatory efforts to establish a mandatory baseline of climate risk disclosures for all companies. Until these consistent disclosure standards are established, we find that the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) provide the most effective framework by which companies can develop strategies to plan for climate-related risks and make their businesses more resilient to the impacts of climate change.
As such, we may vote against the independent board leader at companies in the S&P 500 and S&P/TSX Composite that fail to provide sufficient disclosure in accordance with the TCFD framework, including:
• Board oversight of climate-related risks and opportunities
• Total Scope 1 and Scope 2 greenhouse gas emissions
• Targets for reducing greenhouse gas emissions
The 2023 guidelines continue to encourage providing TCFD-related disclosures – but they no longer threaten “against” votes for companies that omit GHG emissions data or targets for reducing greenhouse gas emissions. Here’s the new language:
State Street Global Advisors finds that the recommendations of the Taskforce on Climate related Financial Disclosures (TCFD) provide the most effective framework for disclosure of climate-related risks and opportunities. As such, we may take voting action against companies in the S&P 500 and S&P/TSX Composite that fail to provide sufficient disclosure regarding climate-related risks and opportunities related to that company, or board oversight of climate-related risks and opportunities, in accordance with the TCFD framework.
We don’t know whether the SEC will take this change into account as it works towards finalizing its climate disclosure rule, but it seems to detract from the notion that investors resoundingly want emissions data.
Earlier this week, the SEC announced charges against a “crypto asset entrepreneur” and three of his wholly-owned companies for what the SEC is saying were unregistered offers & sales of crypto asset securities, as well as market manipulation allegations based on purported “wash trades.” What’s interesting even if you’re not generally following the ins & outs of crypto is that in its 50-page (!) complaint – the SEC has taken an expansive view of the type of activity that violates Sections 5(a) and 5(c) of the Securities Act, which require issuers to register offerings of securities through an effective registration statement before the securities are offered and sold to the public (or to have a valid exemption from registration).
The Commission has taken issue not just with sales for cash, but also “giveaways.” For example, in regard to an “emoji contest” in which participants could win a combined 31,000 of the coins at issue for sharing what the SEC calls “promotional artwork” and emojis on social media, the complaint says:
By entering the “emoji contest,” participants provided the defendants with valuable consideration—the online promotion of the their platform and ecosystem, promotional artwork to feature on the their website, and the Twitter and Facebook handles of entrants and their tagged friends—in exchange for an opportunity to receive their crypto assets.
Neither the defendant nor his entities took any steps to exclude U.S. persons from receiving coins in this offering, and at least one of the winners who received the crypto assets was a resident of this District.
Airdrops: also problematic, in the SEC’s view.
There’s a lot more to this complaint, which as I mentioned goes on for 50 pages. It’s just the latest in a string of SEC crypto-related enforcement actions and head-shakings, all of which build on a a 50% year-over-year increase in enforcement actions in 2022. Coinbase also furnished a Form 8-K this week to disclose its receipt of a Wells Notice which the company believes could relate to its spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.
Since John covered an NBA connection a few weeks ago and I don’t want to let anyone down who follows this blog for celebrity gossip, I’ll note that expectant mom Lindsay Lohan and several others were also caught up in this. They settled allegations that they illegally touted the crypto assets.
At the risk of the boomers telling me to “get off their lawn” and millennials asking, “what about us?” – I’d like to flag a study from three assistant/associate professors at the University of New Hampshire that says Gen Xers have left their “slacker” stereotype behind in the boardroom and are associated with significantly better company performance. Here’s more detail:
Our analysis indicates that the percentage of Gen X directors on the board is significantly and positively related to firm value. We use several econometric techniques to address the concern that this effect could be driven by a simple age effect or by other director and firm characteristics correlated with the likelihood of having Gen X directors on the board.
Furthermore, we shed light on the potential channels through which Gen X directors could be influencing company performance. First, we find that firms with Gen X directors make value enhancing investments in corporate social responsibility (CSR). Second, we document that male Gen X directors facilitate the inclusion of women on the board which ultimately leads to better firm performance. Lastly, we find that Gen X directors are especially valuable for firms that engage in knowledge-intensive activities.
The usual caveats apply here – the data is backward-looking & has already aged (although the data set goes through 2017, that feels like a lifetime ago…how are these companies doing today?). As someone “on the cusp” and not clearly a member of any specific generation, I have no real dog in this fight. The point is that for one shining moment in time, Gen X is the MVP. Let’s allow them to relish it.
Maybe you find this inspiring. “Now I can hedge against a painful encounter with MRSA!” you say as you trade stocks on your way to the hospital. If that’s the case, good on you, please do not let me rain on your parade.
ICS makes a compelling case for this being a measurable “ESG” issue – with these types of data points:
– Share of net sales of antibiotics dedicated to intensive animal farming
– Hygiene management methods at healthcare facilities
– Reducing pharmaceutical ingredients, including antimicrobials, in wastewater at production sites
This all makes sense, but the headline without that context is the type of thing that gives ESG a reputation for being totally absurd in some circles. You would think that humanity could pull together just for the sake of the common good, but apparently “seeking alpha” is the only thing that folks can agree on.
The SEC scored a big win last year on a novel “shadow trading” case that it brought in 2021, when a federal court allowed the litigation to proceed. That case hasn’t been decided – but if the SEC is feeling lucky, a ProPublica investigation that was published last week may give the Enforcement Division a jumpstart in finding more trades to investigate. Here’s an excerpt:
ProPublica analyzed millions of those trades, isolated those by corporate executives trading in companies related to their own, then identified transactions that were anomalous — either because of the size of the bets or because individuals were trading a particular stock for the first time or using high-risk, high-return options for the first time.
The records give no indication as to why executives made particular trades or what information they possessed; they may have simply been relying on years of broad industry knowledge to make astute bets at fortuitous moments. Still, the records show many instances where the executives bought and sold with exquisite timing.
Such trading records have never been publicly available. Even the SEC itself doesn’t have such a comprehensive database. The records provide an unprecedented glimpse into how the titans of American industry make themselves even wealthier in the stock market.
Bloomberg’s Matt Levine pointed out that there are situations where executives may be making these types of trades for non-nefarious reasons, such as hedging:
One possibility here is that he was deeply informed about the auction, he had nonpublic information that made him think that Nationstar would win, and he bought Nationstar stock to bet on it going up. Another possibility is, look, there was an auction, somebody was going to win, and it would be good for him if his company won and bad for him if another company won. He did his best to win, but he bought shares in the other company to cushion the blow in case he lost. If Ocwen had won this auction, presumably he’d have a loss on his Nationstar shares, but he’d have a gain on his Ocwen shares and his career generally; this $157,000 gain was the consolation prize.
If the SEC starts pursuing this theory more aggressively, that type of bet may not be worth the risk. The Commission is already using data analytics to find irregular trades, and so is the DOJ! So, this new “data trove” may add to the regulators’ arsenal.
The question for us compliance folks is whether the insider trading policy should include a broad prohibition on trading in other public company securities, including competitors. Having that language could make it more likely that an insider would face consequences for “shadow trading” – but it may also provide more protection to the company, if it gets caught up in the investigation. Ideally, it also would keep everyone out of hot water in the first place. This report could help executives take the prohibition to heart.
One of the many practical difficulties in complying with the SEC’s new parameters for Rule 10b5-1 plans is navigating the fact that what may seem like “plain vanilla” transactions relating to equity awards can cause problems for your insiders and company. A member recently asked this question on our “Q&A Forum” (#11,532):
Our plan documents (like several other companies) permit the company to require award recipients to satisfy tax withholding obligations through sell to cover transactions at the time of award vesting (here, RSUs), and authorize the company to determine the means of the sell to cover transaction and even to arrange the sale on behalf of the award recipient without consent. In terms of amount of shares to be sold, the company is authorized only to sell shares in an amount necessary to satisfy tax withholding obligations.
The company is looking to exercise this right as a standing requirement for all award recipients going forward until further notice. Under the new 10b5-1 rules, (1) would the company’s exercise of this right typically have the benefit of being a 10b5-1 plan “eligible sell to cover transaction” by itself, (2) would the sell to cover transaction require a 90-day cooling off period and (3) can the company only force the sell to cover transaction when it is not in possession of MNPI? (I presume the sell to cover transaction would be matchable for any Section 16 officer participant, given it would still be a sale by the award recipient.)
John responded:
I suppose it’s possible that a properly structured plan like the one you’ve outlined might be able to fit within the confines of the “sell-to-cover” exemption, although as our panelists pointed out in our webcast on the 10b5-1 amendments, there are all sorts of issues that may make the sell-to-cover exemption extremely cumbersome in practice. I also discussed those issues in the most recent issue of The Corporate Counsel newsletter.
Since the sell-to-cover exemption only applies to the restriction on multiple plans, I believe the cooling off period would apply to transactions under that plan. However, even if you structure these plans to meet Rule 10b5-1’s requirements with respect to the executives, I think that the fact that the company would effectively control the sales made under this arrangement would compel it to either structure the plan in way that permitted the company itself to rely upon Rule 10b5-1 or to make sales only at times when it was not in possession of MNPI and otherwise in accordance with the provisions of its insider trading policies.
Suffice it to say, it is easy to get tripped up under these new rules. Make sure to think carefully about any transactions, and remember that Form 4 and Form 5 filings made after April 1st will need to have a checkbox that says whether a trade is made pursuant to a Rule 10b5-1 plan. Alan blogged the other day on Section16.net that Edgar has been updated to accomodate that revision.
A new Delaware case that was filed last week may impact how far stockholder agreements can go, as reported in Law360. Brian Seavitt – who was also a plaintiff in the SolarWinds litigation – filed a class action complaint taking issue with a stockholder agreement between a publicly held company and two private equity firms.
The stockholder agreement gives the firms a contractual right to remove directors, approve borrowing arrangements and other significant corporate transactions, and terminate or hire the CEO. It also allows the private equity directors to veto other directors’ selections to fill board vacancies. The plaintiff wants to invalidate parts of the agreement as unenforceable under the Delaware General Corporation Law.
Private equity folks will be watching this case as it proceeds. On Twitter, Tulane’s Ann Lipton pointed out that it also could have implications for public companies with “special governance rights.” A 2021 study that Ann shared from Michigan Law School’s Gabriel Rauterberg found that 15% of companies going public from 2013 – 2018 had a shareholder agreement that continued after the IPO.
In addition, dual-class shares have surged in prevalence at new public companies over the past few years – with nearly one-third of 2021 IPOs having that capital structure. The rights in a dual-class situation can vary – as explained in this paper from BYU Law’s Jarrod & Gladriel Shobe that Ann linked to – but whichever way you slice it, the structure isn’t not appreciated by institutional investors. Those investors have risen up to fight for equal rights for common equity holders – and they likely will be watching this lawsuit.
3. Board Leadership Disclosures: Lessons From Corp Fin’s Sweep
4. Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It
5. Proxy Fights: Practical Steps for UPC’s Sophomore Year
6. Proxy Disclosures: 12 Things You’ve Overlooked
7. Shareholder Proposals: Finding Success in a Challenging Environment
8. The Latest on Rule 14a-8 No-Action Relief
9. Political Spending: Practical Governance & Disclosure Steps for Fraught Times
10. Human Capital Management: Are You Ready for Detailed Disclosure?
11. Insider Trading & Buybacks: What You Need to Do Now
12. Cyber Risk Disclosures: Key Action Items
13. Climate Disclosures: Requirements & Risks
14. The SEC All-Stars: Executive Pay Nuggets
15. The Top Compensation Consultants Speak
16. Pay Versus Performance: What’s New for Year Two
17. Clawbacks: Key Action Items Now
18. ESG Metrics: Beyond the Basics
19. Navigating ISS & Glass Lewis
I’m very proud of the group of experienced speakers that we’ll be bringing together here – lots of former SEC Staff and other heavy hitters – it’s difficult to spotlight specific folks because everyone is so great! And (especially now that I’ve returned to private practice) I’m excited to get practical guidance as we head into another challenging proxy season & grapple with SEC rule changes, Delaware law issues, an unpredictable political environment, and more.
The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
On Monday, President Biden vetoed a resolution that would have overturned the latest version of the DOL’s “ESG” rule, which was vulnerable because it was just finalized in November. I blogged about the rule on our “Proxy Season Blog” at that time – it allows ERISA fiduciaries to consider ESG factors in the selection of investments for retirement plans and in proxy voting.
With this being the first veto of Biden’s Presidency, it’s getting a lot of press – including on this recent episode of “The Daily” podcast, which succinctly overviews “the state of ESG” for anyone who’s understandably lost track of the back & forth.
Unfortunately for those of us who spend time on ESG-related shareholder resolutions and engagements, we know that this is just the latest chapter in a saga that has been playing out for many years – with the Biden Administration’s 2022 iteration of the rule changing a version that had been finalized by the Trump Administration in 2020 that would have prohibited consideration of ESG factors by ERISA fiduciaries in investing, and so on, back to at least 2015. I personally am finding that this history makes it harder to share in any excitement or outrage that is accompanying this veto.
